We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Guru Online (Holdings) (HKG:8121) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let’s start with an examination of the business’s cash, relative to its cash burn.
When Might Guru Online (Holdings) Run Out Of Money?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at March 2019, Guru Online (Holdings) had cash of HK$23m and no debt. Looking at the last year, the company burnt through HK$30m. Therefore, from March 2019 it had roughly 9 months of cash runway. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Guru Online (Holdings) Growing?
At first glance it’s a bit worrying to see that Guru Online (Holdings) actually boosted its cash burn by 6.2%, year on year. At least the revenue was up 11% during the period, even if it wasn’t up by much. Considering both these factors, we’re not particularly excited by its growth profile. In reality, this article only makes a short study of the company’s growth data. This graph of historic earnings and revenue shows how Guru Online (Holdings) is building its business over time.
How Hard Would It Be For Guru Online (Holdings) To Raise More Cash For Growth?
Since Guru Online (Holdings) has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
Since it has a market capitalisation of HK$55m, Guru Online (Holdings)’s HK$30m in cash burn equates to about 55% of its market value. That’s high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
How Risky Is Guru Online (Holdings)’s Cash Burn Situation?
On this analysis of Guru Online (Holdings)’s cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Guru Online (Holdings) CEO is paid..
Of course Guru Online (Holdings) may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.